The Perils of Privatization

This article appears as part of a special report, "What the Free Market Can't Do," in the Winter 2015 issue of The American Prospect magazine. Subscribe here.

One November morning in 2004, three U.S. military men boarded a small turboprop plane at Bagram Air Base near Kabul for a two-and-a-half-hour flight to Farah, a base in western Afghanistan. They were Lieutenant Colonel Michael McMahon, Chief Warrant Officer Travis Grogan, and Specialist Harley Miller, the only passengers on Flight 61. The flight was operated by an affiliate of Blackwater, the private military company under U.S. contract for air transport of mail, supplies, and troops.

Forty minutes after takeoff, flying far north of the customary route from Bagram to Farah, the plane crashed into the side of a mountain. McMahon, Grogan, the pilot, co-pilot, and the mechanic apparently died instantly. At the time, McMahon was the highest-ranking U.S. soldier to die in the war. Miller, though he suffered internal injuries, may have lived for as long as ten hours after the crash, but the route was so obscure that rescuers could not locate the wreckage in time to save him.

In the years afterward, investigators for a joint U.S. Army and Air Force task force and for the National Transportation Safety Board would reveal that the Flight 61 pilots had never flown the route between Bagram and Farah and, in fact, had been in Afghanistan for only 13 days. Also, they deviated from the standard course almost immediately after leaving the ground. Further, according to investigators, Blackwater failed to follow standard precautions to track flights, failed to file a flight plan, and failed to maintain emergency communications in case of an accident. The NTSB report included a cockpit voice recording of the plane’s crew, which Representative Henry Waxman read to members of Congress at an October 2007 hearing before the House Committee on Oversight and Government Reform. Parts of it depict the pilots’ unprofessional behavior and their jollity as they flew through narrow canyons on their wayward route:

“You’re an X-wing fighter Star Wars man,” said one of the pilots.

“You are [expletive] right. This is fun,” the co-pilot replied and later said, “I swear to God they wouldn’t pay me if they knew how much fun this was.”

Blackwater went into the annals of government contracting as one of the great disgraces of privatization. A staff report prepared for the Oversight Committee found that Blackwater billed the government $1,222 per day per guard, “equivalent to $445,000 per year; over six times more than the cost of an equivalent U.S. soldier.” Reeling from scandals, Blackwater later reorganized and changed its name to Xe, and then again to Academi, which is now part of a holding company called Constellis.

With this record, how could the company continue to get government contracts for several more years? It had cozy relationships with military brass on the ground. Its top officials and directors included Cofer Black, the former head of the CIA’s counter-terrorist center; Bobby Ray Inman, former head of the NSA and deputy director of the CIA; former Attorney General John Ashcroft; and Jack Quinn, former White House counsel to President Clinton and chief of staff to Al Gore.

Blackwater, however, is hardly a one-off in the abuses of privatization, though it is a useful place to start. According to enthusiasts of free-market discipline, privatizing a public service—in this case, military support operations—offers efficiency and cost savings. Private companies, presumably, are under market discipline and are free of cumbersome bureaucracies and stultifying government monopolies. They are thus free to innovate. But the reality is far messier.

(AP Photo/Gerry Broome)

A firearms and tactics instructor at Blackwater Worldwide, the private security contractor

As Blackwater showed, many of the efficiencies are spurious, because contractors cut corners. The notion of market discipline can be short-circuited by political influence that steers contracts to favored companies despite their poor performance. Often, apparent savings are bogus because of costs that are passed along to the government. In some cases, privatizing something as necessarily public as national defense is convenient because the contractor, not the government, takes the fall when something goes wrong. This is precisely the opposite of accountability.

Moreover, efficiency in the sense of cost savings is not always the right goal in the public sector, nor does it define success. The most successful option in a military campaign may not be the quickest or the least expensive. As the Blackwater experience showed, hiring military contractors in war zones introduces significant risks—such as deficiencies in vetting, training, and oversight, especially at the level of subcontractors—that can potentially detract from overall military effectiveness. As one military analyst noted in his study of the risks of privatizing counterinsurgency operations, “Whenever efficiency outweighs accountability, the possibility exists of efficiency undermining effectiveness of services and democratic values.”

Further, the cost savings so often proclaimed by privatization advocates as the measurement of success are the immediate and apparent ones, which are short-term. But costs are frequently hidden, especially considering that for every U.S. contract there can be as many as five layers of subcontracting. If the oversight is weak, there is always the potential for abuse, waste, and corruption, resulting in human costs as well as financial. For example, in Afghanistan in October 2009, when insurgents attacked a U.S. combat outpost purportedly protected by Afghan security guards under U.S. contract, the guards fled, and were found “huddling in their beds.” Lost in the controversy over the death of Ambassador J. Christopher Stevens in the 2012 Benghazi attack was the role of private contractors. When the attack began, the subcontractors hired by a U.S.-contracted private security firm to guard the perimeter and entrance to the diplomatic compound fled, leaving the guards on the inside vulnerable.

According to a report from the Senate Armed Services Committee, there were U.S.-contracted guards in Afghanistan working directly for the local Taliban. The committee’s report found that private security contractors were “funneling U.S. taxpayers dollars to Afghan warlords and strongmen linked to murder, kidnapping, bribery as well as Taliban and other anti-Coalition activities,” including more than $12,000 a month to the salary of a Taliban supporter. And more recently, a nasty legal feud between military auditors and the big defense contracting firm KBR exposed the striking fact that the company had continued to submit bills to the U.S. government for nine months after the 2012 end of its multimillion-dollar contract to provide training in detecting improvised explosive devices.

Equally unsettling and revealing is the multibillion-dollar industry of prison privatization. The U.S. imprisons more people than any nation in the world, resulting in a potential bonanza for private prison companies whose business model depends on high incarceration rates. According to the American Civil Liberties Union, “The private prison industry has been a key player over the past two decades in driving the explosion of mass incarceration in the U.S.” Between 1990 and 2009, the number of inmates in private prisons nationwide, including state and federal, has increased by more than 1,600 percent.

Studies and audits of privately held prisons in recent years show that the cost-cutting incentive threatens the quality of food, medical care, and sanitation and may even contribute to heightened violence. In 2012, a federal judge in Mississippi described the abuse and beatings at a privately operated youth correctional facility as “a picture of such horror as should be unrealized anywhere in the civilized world.” In Texas, an auditor’s report at a privately held juvenile facility revealed that living conditions were abhorrent, depicting the cells as “filthy, smelled of feces and urine.”

In 2012, The New York Times, after a ten-month investigation of privately held halfway houses in New Jersey, exposed an array of horrors, ranging from sexual abuse of female inmates to lax security and a significant number of escapes, and from drug dealing and gang activity to fraudulent records of drug treatment with fabricated rehabilitation progress. And all such incidents could easily be bundled into one immense deceit: inadequate oversight, well concealed by a tangle of corporate influence and New Jersey politicians from both parties, including Governor Chris Christie. The governor, in fact, was once the lobbyist for a company operating several New Jersey halfway houses, such as one 900-bed facility that was run by his close friend, former partner, and political adviser, and publicly endorsed and praised often by the governor himself. Workers at that facility told reporters that robbery, sexual assault, and violence drove inmates to “regularly ask to be returned to prison, where they feel safer.” And within a day of escaping another of the company’s “houses,” one inmate had murdered a former girlfriend.

Privatization, in sum, is effectively a fraud. When a product is provided purely via the market, and there are no public purposes involved, market accountability can work. Consumers can compare price and quality, and give their business to the vendor offering the best product at the most attractive cost. Alternatively, when government performs a function directly, there are public forms of accountability, such as congressional hearings and GAO investigations. But when a public function is privatized, the result is a muddled middle ground, where neither market accountability nor public accountability works well because of all the layers of intermediaries. Enthusiasts of markets claim that government is the domain of political corruption, while markets are transparent. But the actual track record of privatization shows that there can be at least as much corruption and deception in privatizing a service as in providing it directly. For all the rhetoric about public-private partnerships, our society works better when we keep public functions public and private ones private.